The document discusses the rules of debit and credit in a double entry accounting system. It explains that under this system, every financial transaction requires an equal and opposite entry to another account. Debits are used for expenses, assets, and withdrawals when they increase, and credits are used for income, liabilities, and equity when they increase. Several examples are provided to illustrate how to apply debits and credits to different business transactions according to whether accounts increase or decrease. Mnemonics are also provided to help remember which accounts are normally debited and credited.
The document discusses the rules of debit and credit in a double entry accounting system. It explains that under this system, every financial transaction requires an equal and opposite entry to another account. Debits are used for expenses, assets, and withdrawals when they increase, and credits are used for income, liabilities, and equity when they increase. Several examples are provided to illustrate how to apply debits and credits to different business transactions according to whether accounts increase or decrease. Mnemonics are also provided to help remember which accounts are normally debited and credited.
The document discusses the rules of debit and credit in a double entry accounting system. It explains that under this system, every financial transaction requires an equal and opposite entry to another account. Debits are used for expenses, assets, and withdrawals when they increase, and credits are used for income, liabilities, and equity when they increase. Several examples are provided to illustrate how to apply debits and credits to different business transactions according to whether accounts increase or decrease. Mnemonics are also provided to help remember which accounts are normally debited and credited.
The document discusses the rules of debit and credit in a double entry accounting system. It explains that under this system, every financial transaction requires an equal and opposite entry to another account. Debits are used for expenses, assets, and withdrawals when they increase, and credits are used for income, liabilities, and equity when they increase. Several examples are provided to illustrate how to apply debits and credits to different business transactions according to whether accounts increase or decrease. Mnemonics are also provided to help remember which accounts are normally debited and credited.
Under the Double Entry System of accounting, every entry to an account will require an opposite entry to another account. This is guided by the idea that there is an equal and opposite effect in every financial transaction. This is the reason why there are two sides— the DEBIT and the CREDIT.
*the terms debit and credit have already been introduced in the previous unit
If you may recall from the previous unit (analysis of business transactions), a particular transaction will always cause the left and right side of the accounting equation to be equal or balanced. Every time the left side increases, the right also increases. When the
left side decreases, the right side also decreases. In some cases, when the left side is not affected, the right side will also have the same.
Using the normal balances as your guide, you can clearly demonstrate the rule:
DEBIT expenses, assets, and drawings/ withdrawals when they INCREASE. When they DECREASE, we put them on the other side which is CREDIT.
CREDIT income, liabilities, and owner's equity every time they INCREASE. When they DECREASE, we put them on the other side which is DEBIT.
Therefore, when an account is placed on its normal balance, such account increases. When an account is put on the opposite side, that account decreases. (see the table of normal balances at the summary of topics from the previous unit).
There are transactions, however, that won’t be recorded in the books and therefore won’t be assigned with a debit or credit entry. An example would be the personal transactions of the owner (recall the accounting entity assumption). A company event that won’t affect any asset, liability, capital, income or expense won’t be recorded as well.
Illustrative Problem:
Using the problems and answers from the previous unit (Mireio Motor Servicing), you will assign the account titles and their corresponding position (whether debit or credit).
1/3 The owner (Mireio) invested money as initial capital for his business.
A = L + C Increase = No Effect + Increase
Debit: Cash Credit: Mireio, Capital or M., Capital
Since cash is an asset and it increased, it is placed on the debit side. The account “Mireio, Capital” is a capital account and it increased due to the investment. Hence, it will be on the credit side.
1/12 The owner pulled out a portion of his cash investment from his business. Page 1 of 4 A = L + C Decrease = No Effect + Decrease
Debit: Mireio, Drawing Credit: Cash
Due to the act of withdrawal, the drawing account increased (with a corresponding decrease to capital) and so it is placed on the debit side. Since cash was withdrawn from the business, it decreased, and thus, will be placed on the credit side.
1/13 A new machine was acquired for the store that is being operated. Said purchase was paid, ₱35,000.
A = L + C No Effect = No Effect + No effect
Debit: Machinery Credit: Cash
Both machinery and cash are assets and have opposite effects. Machinery increased so it is placed on the debit side. Cash was used to pay and so it decreased and found its way on the credit side.
1/14 The business acquired a computer set to be used in the office. The purchase was made on account/on credit.
A = L + C Increase = Increase + No effect
Debit: Office Equipment Credit: Accounts Payable
With the acquisition of office equipment, there is an increase in asset, and so it is
placed on the debit side. However, since the acquisition was made on account, liabilities increased thereby placing accounts payable on the credit side.
1/15 Supplies were bought on account.
A = L + C Increase = Increase + No effect
Debit: Supplies Credit: Accounts Payable
Supplies will become part of assets because it can be used in the future. After buying it, supplies account will be debited due to the increase in assets. Since the items were acquired on account, there will be an increase in the liability section in the name of accounts payable which will be place on the credit side.
1/23 Refer to the transaction from January 14. This time, the business paid for the computer set that was purchased on credit/ on account.
A = L + C Decrease = Decrease + No effect
Debit: Accounts Payable Credit: Cash
Page 2 of 4 With the payment of the obligation, the liabilities will decrease. This is the reason why accounts payable is found on the debit side.
Cash is the asset used for the payment and such act causes it to decrease. With this, cash is positioned on the credit side.
1/24 Services were rendered to clients but they haven’t paid yet (without promissory note). See the answer below.
A = L + C Increase = No Effect + Increase
Debit: Accounts Receivable Credit: Service Revenue
The customer has made no payment after availing the services. Because of this, the business is entitled to collect a sum from them. This causes an increase in asset called accounts receivable. Since the assets increased, the account title shall be on the debit side.
An income account called service revenue has to be recognized since services have already been rendered. Note that an increase in income will be reflected on the credit side.
1/27 In relation to the transaction from January 24, assume that the clients paid. Here is the analysis:
A = L + C No effect = No Effect + No effect
Debit: Cash Credit: Accounts Receivable
This is a simple collection of payment from your clients. Your accounts receivable previously recorded will now DECREASE because you already received payment. Hence, it will be on the credit side.
On the other hand, your “cash” will INCREASE. Thus, it is positioned on the debit side.
1/28 The business received the electricity bill and payment has been made immediately A = L + C Decrease = No Effect + Decrease
Debit: Utilities Expense Credit: Cash
An expense called utilities expense is being incurred. With this, there is an
increase in expense. Hence, the account is on the debit side.
Using cash to pay for the bill, assets will decrease. Therefore, cash must be on the credit side.
1/30 The business paid for an insurance premium in advance.
A = L + C No Effect = No Effect + No Effect
Page 3 of 4 Debit: Prepaid Insurance Credit: Cash
Payment has been made in advance for something that can be used in the future. This results in both increase and decrease in assets at the same time. Prepaid insurance increases while cash decreases.
1/31 For business use, the business owner borrowed money from the bank.
A = L + C Increase = Increase + No Effect
Debit: Cash Credit: Loans Payable
Since the money borrowed was for the business, such money will go to the company. Therefore, assets will INCREASE in the form of cash. With this, the account cash must be debited.
On the other hand, the act of borrowing money from the bank will result in an INCREASE in liability/obligation called loans payable. Such account must be on the credit side.
Summary of topic/section
You may use these mnemonics to easily recall the rules of debit and credit.
Just remember these codes: DEAD and COIL.
Debit Credit
E- expenses O- owner’s equity
A- assets I- income D- drawings L- liabilities
Expenses, assets, and drawings are debited once they increase. When they decrease, they should be on the credit side.
Owner’s equity, income, and liabilities are credited once they increase. When they decrease, they should be on the debit side.
Note that not all events are to be reflected in the accounting books. Personal transactions of the owner and any event in the business that does not affect assets, liabilities, capital, income or expense are not recorded.
